China Aviation Poised To Take Off

China Eastern, one of three state-owned airlines that have dominated China’s skies, now stands to have competition from new airlines, some of which are funded with private capital. (Photo: Gabriele Stoia)

Recognizing its potential to become a major industry player, China is finally moving toward greater liberalization of its aviation sector. The announcement followed on the heels of the Third Plenary Session held in November 2013. It was during this time that China’s new leaders, alongside the Civil Aviation Administration of China (CAAC), committed to a series of reforms geared to loosen the regulatory grip that has significantly hindered industry growth. Now, eight months later, signs of change are on the horizon.

Perhaps the most notable development to date has been the lifting of the six-year moratorium that previously restricted private carriers from entering the market. In an effort to bolster the economy, China is turning toward reevaluating private investment as a critical component of aviation growth. As such, the existing regulatory framework has been extended to allow new airlines to establish themselves once again–a major shift for China, which has traditionally been dominated by the state-owned Big Three–where Air China, China Southern and China Eastern have monopolized both airspace and airport slots since 1988 and currently account for about three quarters of the aviation market.

12 Good Airlines

Making good on its promise, the CAAC recently approved several new airlines funded with private capital. China’s newest airline, Qingdao Airlines, launched services on April 27 from its base at Qingdao Airport, while Ruili Airlines is set to launch later this year from Kunming Changshui International Airport. In total, 12 new entrants are poised to launch service by year-end, increasing the number of passenger airlines to 40.

While most of the new entrants follow a full-service model, the CAAC has signaled greater support for low-cost carriers. LCCs are aligned with China’s plans to develop a network of special economic zones throughout the region. The movement of goods and people are of strategic importance to China, which boasts the strongest performing domestic market in 2013. Despite a decline in GDP growth, air travel increased by 11.7 percent last year and IATA forecasts that by 2017 China will see an additional 227.4 million passengers. Some 195 million will be domestic, while 32.4 million will be international. Meanwhile, Airbus predicts that China will overtake the world’s largest domestic market, the U.S., by 2031.

But growth comes at a cost. China is notorious for airport congestion and limited time slots, which is by no means exclusive to first-tier airports. According to CAPA, Chinese airports handled 753.4 million passengers in 2013. While the new entrants will operate out of second-tier cities, they too will face constraints.

Lack of Infrastructure

Understanding that a lack of infrastructure has historically hampered growth, the CAAC has plans to add an additional 80 new airports by 2020, including a $14.5 billion second airport in Beijing. Upgrades to existing facilities are also in the works.

For Kunming in the southwest, this has meant a brand-new $3.6 million airport capable of accommodating 38 million passengers. Launched in June 2012, the airport is the fourth largest in China, after Beijing, Shanghai and Guangzhou. Kunming is also China’s fastest growing airport, posting a 23.9-percent growth rate in 2013.

In the West, Diwopu International Airport in Urumqi re-opened its Terminal One on April 1 to ease capacity congestion. Urumqi serves as a continental hub for China Southern and is vying to establish itself as a global financial center comparable to Dubai.

Two of China’s newest carriers–Donghai Airlines and Loong Airlines–operate out of Shenzhen Bao’an International Airport and Hangzhou Xiaoshan International Airport respectively. Situated just north of Hong Kong in Guangdong Province, Shenzhen’s newest terminal, which launched in November 2013, was constructed by the Italian group, Studio Fukas, at an estimated $1.4 billion. On May 21, a high-speed rail connecting the airport to the city’s north station was launched.

Meanwhile expansion is under way at Hangzhou in Zhejian Province. The country’s 10th largest airport is currently conducting flight tests in preparation for opening up its second runway.

While 70 percent of passenger volume occurs in the north, northeast and eastern parts, China hopes that LCCs will encourage traffic in the west. The CAAC has reformed the previous pricing mechanism to allow start-ups to set the new minimum fare as low as 16 cents (one yuan) to stimulate growth.

Obstacles Remain

However, despite this newfound respect for low-cost models, challenges do remain. “The military, which controls China’s airspace, has been rather inflexible towards civil aviation operations. As the industry has grown, so has congestion,” said Andrew Herdman, director general of the Association of Asia Pacific Airlines. “This has created a cascade effect on major trunk routes resulting in a chronic problem and impacting growth. While this is not a unique challenge to China, airspace management needs to be shared to liberalize market access.”

Another critical area is the government-imposed restrictions on aircraft importation. Unlike other countries where airlines have the power to decide the time and volume when purchasing aircraft, a central procurement process is in place with the government calling the shots.

A one-airline/one-route policy also exists that restricts one carrier to one long-haul service. The exception is Air China, which operates from both Beijing and Shanghai. Finally, high airport charges, taxes and tariffs have also impeded growth.

With the launch of new entrants China will be forced to examine these issues. For now, aircraft and OEM manufactures have seen a continuing boom in new orders. Boeing predicts that China alone will need nearly 6,500 aircraft by 2032.

While China lacks the expertise and technology to compete with the Airbus/Boeing duopoly that dominates aircraft manufacturing, several homegrown industries manufacture OEM parts. Under the conglomerate Aviation Industry Corporation of China (Avic), Xi’an Aircraft Industry was the first to obtain international orders and has manufactured both fuselage sections and wingboxes for Airbus and Boeing. Avic Shenyang Aircraft Industry satisfies OEM orders for Airbus, Boeing, Bombardier and Cessna, while Avic Hongdu Aviation Industry Corp. has completed OEM services for Bombardier, Goodrich and Vought.

Finally, private company Zhejiang Xizi Aviation Industry Co. manufactures the APU door and ram-air turbine door for the C919–a 168-seat-narrowbody jetliner manufactured by state-owned Commercial Aircraft Corporation of China (Comac). Set to launch in late 2016, the C919 will compete against the Airbus’s A320 and Boeing’s 737.